Rwanda’s GDP growth to slow down if aid suspension enters into 2013

Saturday October 27 2012

In Summary

The government has given itself until the end of the second quarter of the fiscal cycle in December before deciding on necessary changes to the national budget and the projects that should be suspended.

Rwanda reacted angrily to the suspension of aid, with President Paul Kagame recently questioning the motives of aid givers.

Professor James Putzel, noted for his research on “fragile states”, said donors had acted rather hastily in their decisions to withhold aid.

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By GAAKI KIGAMBO

Rwanda’s GDP growth is likely to slow down by two percentage points as inflation increases slightly to 7.5 per cent should aid suspension spill over to the first half of 2013.

The International Monetary Fund estimates Rwanda’s real GDP growth to have reached 9.9 per cent in the second quarter of 2012, buoyed by a rise in investments, strong growth in exports, and a reduction in inflation from 8.3 per cent in December 2011 to 5.8 per cent in August 2012.

“Of course if there are delays or cuts to financing it will affect the GDP. If we get to a point where we think we will not get the money, then we will revise our fiscal and monetary plans and then that will show how (the aid withheld) impacts the GDP. As for now, we don’t see any need of revising our projections for the fiscal or calendar year,” John Rwangombwa, Rwanda’s Minister of Finance and Economic Planning, told The EastAfrican.

The government has given itself until the end of the second quarter of the fiscal cycle in December before deciding on necessary changes to the national budget and the projects that should be suspended.

In July and August, the US, the African Development Bank, the UK, Germany and Sweden withheld budget support amounting to $128.1 million (Rwf 78.4 billion) in reaction to allegations by a UN team’s findings that Rwanda was behind a new rebellion in eastern DRC. But Kigali has refuted the accusations insisting it is not interested in destabilising the region.

Save for the symbolic $200,000 from the US that was directed towards military support, a lot of the money was earmarked for the judiciary, agriculture and rural roads. In September, the UK restored half the money it had suspended (£8 million or Rwf 7.8 billion), which is directed towards programmes in education and food security.

Longer than expected

Rwanda reacted angrily to the suspension of aid, with President Paul Kagame recently questioning the motives of aid givers. “No country in this world receives aid and accounts for it better than Rwanda. So, I am not sure if these people who give us aid want us to develop. They give us aid and expect us to remain beggars. They give you aid so that you forever glorify them and depend on them. They keep using it as a tool of control and management,” President Kagame said on October 4, while opening the 2012-13 Judicial Year.

Professor James Putzel, noted for his research on “fragile states”, said donors had acted rather hastily in their decisions to withhold aid. In a new report he has co-authored, he cautions donors to review their formulaic ways in which they peg money on democracy, human rights, and good governance.

Mr Rwangombwa said the delays “have been longer than we expected and we still hope by the end of the year we will be back to normal life, more or less, because we still expect aid to come.

“We are looking at what has been delayed. Part of it is what we call front-loading of the disbursements. It doesn’t mean all the money that we were to receive in the first six months was to be used in the first six months. Still part of it would go into the second part of the fiscal year. The effect has been maybe around 10 per cent of the total budget that we were to spend in the first half of the fiscal year,” he said.

The uncertainty about the future of foreign aid featured prominently in recent discussions between the IMF and the government following a visit by a team of experts from the Fund to advise the latter on how best to mobilise more domestic resources. Currently, tax revenues account for 13.5 per cent of Rwanda’s GDP, which is fairly low compared with the average of 25 per cent for sub-Saharan African countries.

As a result of aid suspensions, Rwanda is looking to cut back on its dependence on external support, which currently accounts for nearly half its annual expenditure.